[1] This appeal concerns Mary M. Aylward's 1992, 1993 and 1994 taxation years. The issue is whether she is entitled to deduct rental losses from a single family home in the amounts of $5,251 in 1992, $4,997 in 1993 and $5,225 in 1994.

[2] In 1989, she purchased 3,220 Turnstone Crescent, Mississauga, Ontario, for $260,000 - financed by a first mortgage of $193,761.00. She had entered into an agreement for purchase when the house was under construction with the intention of "flipping" it, at a profit, on or before closing. The serious downturn in the market and a prevention clause in the agreement frustrated her intentions. In 1990, she moved in personally together with a cousin. When the cousin paid no rent for two years, the Appellant evicted her and rented one of the four bedrooms to a student, continuing to occupy the remainder. The rent was $400 monthly.

[3] From 1992 to 1994 the Appellant reported rental income, expenses and losses from the property as follows:

YEARINCOMEINTERESTTOTALRENTALLOSS

EXPENSEEXPENSESPORTION

(33%)

1992 $4,800 $22,221 $30,154 $10,051 $5,251

1993 $4,800 $21,784 $29,392 $ 9,797 $4,997

1994 $4,800 $20,654 $30,165 $10,055 $5,225

[4] The Appellant also reported net rental losses in respect of other properties she owned in the taxation years prior to 1992 as follows:

YEARGROSS INCOMEEXPENSESNET LOSS

1987 $ 3,900 $ 7,767 $ 3,867

1988 $ 7,675 $ 9,727 $ 2,052

1989 $13,350 $23,629 $10,279

1990 $12,600 $22,218 $ 9,618

1991 $ 1,050 $ 6,368 $ 5,318

[5] Since 1994, the Appellant has rented the entire house to one tenant for approximately $1,450 monthly. Since 1994, the interest on the $194,000 mortgage has been reduced from in excess of 10% to less than 5% per annum. The $260,000 home is now evaluated at $217,000. The Appellant explained she works at three jobs to pay the negative cash flow from the property. In giving her occupation to the Court, in semi jest, she described herself as a professional toilet cleaner. There is no doubt that she works very hard and much of her savings have gone towards paying the mortgage payments and other expenses.

[6] She has no accounting background and left the preparation of her income tax returns to her accountant, trusting in good faith that her affairs were reported properly.

[7] The Respondent submitted that:

- the Appellant did not have a reasonable expectation of profit from renting the Property in the 1992, 1993 and 1994 taxation years, that the expenses claimed were personal or living expenses of the Appellant, and that the Appellant was properly reassessed in accordance with paragraphs 18(1)(a) and 18(1)(h) of the Act.

- the rental expenses were not incurred for the purpose of gaining or producing income from a business or property within the meaning of paragraph 18(1)(a) of the Act.

- the deduction of the disallowed rental expenses is prohibited by section 67 of the Act as they are not reasonable in the circumstances.

- the Appellant was correctly reassessed for the 1993 taxation year to reduce the Credit she claimed for her mother to $4,502 in accordance with paragraph 118(1)(b) of the Act.

[8] The Appellant entered in evidence a floor plan of the 4 bedroom, 2 storey home. It would appear that 20% would have been a more realistic allocation to the tenant than the 33% claimed by her.

Analysis

[9] In reflecting an allocation of 33% of the total expenses to the rental activity, the Appellant clearly did not have a reasonable expectation of profit. As stated by the Respondent, the gross annual rental of $4,800 did not cover 1/3 of the annual interest cost which was approximately $7,000 annually.

[10] In the A.G. of Canada v. Mastri et al., 97 DTC 5420, the Federal Court of Appeal confirmed its decision in Tonn et al. v. M.N.R., 96 DTC 600. In Mastri supra, the Court re-stated the common sense understanding that the Courts are not to second-guess the business acumen of a taxpayer whose commercial venture turns out to be less profitable than anticipated.

[11] In Tonn supra, the Court held that no personal advantage had accrued to the taxpayer. In the present case, the taxpayer lived in the home for several years until sometime in 1993 when she moved out and her mother and other relatives moved in together with the arm's length tenant who occupied approximately 20% of the premises.

[12] In Mastri supra, the Court stated that it was decided in Moldowan v. M.N.R., [1978] 1 S.C.R. 480, that in order to have a source of income a taxpayer must have a reasonable expectation of profit. Second, "whether a taxpayer has a reasonable expectation of profit is an objective determination to be made from all of the facts". If as a matter of fact a taxpayer is found not to have a reasonable expectation of profit then there is no source of income and, therefore, no basis upon which the taxpayer is able to calculate a rental loss.

[13] The Court added that the reference to the Moldowan supra test being applied "sparingly" is not intended as a rule of law, but as a common-sense guideline for the judges of the Tax Court. In other words, the term "sparingly" was meant to convey the understanding that in cases, for example, where there is no personal element the judge should apply the reasonable expectation of profit test less assiduously that he or she might do if such a factor were present. It is in this sense that the Court in Tonn supra cautioned against "second-guessing" the business decisions of taxpayers.

[14] In the present case, I have no difficulty in finding that based on the allocation of 33% there was no reasonable expectation of profit. There was no source of income and therefore no basis upon which the taxpayer is able to calculate a rental loss. Furthermore there is a personal element in the present case. The Appellant occupied most of the residence for much of the relevant period while her mother resided in the residence during the remainder of the time in issue.

[15] The Appellant originally purchased the property with the intent of making a gain upon quick sale. There is no need to speculate whether this would have been on account of income or capital. This venture having been frustrated, she moved in as her principal place of residence and attempted to alleviate some of the personal costs by renting a room. She may have been able to expect a profit had a reasonable allocation been made. With an attempt to allocate 33% of the premises as rental, the allocation is unreasonable resulting in an unreasonable expectation of profit. While the Appellant may have very innocently misrepresented her situation on advice received, the rental losses claimed are unreasonable.

The issuance to the taxpayer of shares having a paid-up capital of $350,000 did not give rise to a deemed dividend because they were in respect of past services he had provided to the corporation having an agreed value of the same amount. It was not relevant that the corporation's financial statements did not record the value of the services as a liability.

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